Mergers & Acquisitions

❶Finally, there are Employee Stock Ownership Plans "ESOP" , which call for a firm to tender its own stock, paying for it by borrowing at a bank and then repaying the loan from the employee stock fund. Mergers can also fuel overall growth and provide competitive advantages to the merged firm.

Accounting for Mergers & Acquisitions

Differences in culture between the two organizations, leadership problems, keeping customers happy, and keeping employees happy are all issues that can arise. When two organizations merge there is a period of adjustment as both firms settle into a new overall corporate culture.

Meta-analytic findings indicate that cultural differences have a negative effect on the integration of the merging firms Stahl Many merger decisions are made without regard to differences in culture between firms, especially in international mergers. However, there is much evidence to suggest that cultural differences are a major reason why many mergers eventually fail.

People are often resistant to change and the merging of corporate cultures can often mean great deals of change and upheaval. This can cause employees to become stressed and angry which can lead to underperformance, bad behavior, and attrition. Before a merger, there is a set of management personnel at both the acquiring and target firm.

This can cause significant problems during and after the merger if no clear leadership emerges. Having two CEO's is not generally effective because decisions must often be made quickly and decisively. Signorovitch There can also be many disagreements among the two sets of management on how best to integrate the companies. Often during a merger, the needs of the customer can be overlooked. The target bank locations were rapidly re-branded with the acquiring banks logo, etc.

Page 1 of Table of Contents I. Performance Mergers are often undertaken to improve some measure of performance. Market Factors There can also be market factors that contribute to merger decisions.

Mergers and acquisitions can also allow firms to more quickly respond to market trends than organic growth would allow. Market share is also widely used as a rationalization for mergers. However, the evidence suggests that, although market share may be an incidental motivation, the primary motivation in this regard is revenue growth. Additionally, increased market share does not necessarily translate into increase market power. Mergers and acquisitions also occur in a number of ways.

A firm may identify a target in advance and then either approach it or wait for it to become available. On the other hand, a firm may make an acquisition just because the opportunity presents itself and is determined to be helpful to the firm. McNaught Pre-planned mergers tend to be more successful, as will be discussed later. There are many potential issues with a merger or acquisition. In fact, the Synergy Trap reports that sixty-five percent of strategic acquisitions and mergers result in failure; meaning negative returns in shareholder value and market share Marcum Differences in culture between the two organizations, leadership problems, keeping customers happy,.

The following sections explain the types of mergers and acquisitions and the procedures and methods companies use to complete and finance the business combination.

There are three common forms of mergers that are the result of the relationship between the merging parties. Like mergers, acquisitions can take several forms. In a tender offer, the acquiring company makes a public offer to purchase a majority of shares from the target company's shareholders, thus bypassing the target company's management. In order to induce the shareholders to sell, or "tender," their shares, the acquiring company typically offers a purchase price higher than the market value of the shares, although the acquiring company may require that enough shares must be tendered in order for the acquiring company to gain control of the target company.

If the tender offer is successful, the acquiring company may change the management and certain procedures of the target company or the acquiring company may use its newfound control to effect a merger of the two companies. For instance, in a cash-out merger, the target company is merged into the acquiring company, and the shareholders of the target company are given the right to receive cash for their shares.

There is no single corporate law in the United States that governs business combinations. Instead, each individual state has its own domestic corporation law. However, companies involved in a merger or acquisition must generally obtain the approval of the board of directors for certain significant corporate changes. In addition, the shareholders of a target company are typically required to give their approval for a merger or acquisition. The approval of the boards of directors of the companies has to include such information as the terms of the merger and the entities that will survive or be acquired in the transaction.

Once the required approvals are obtained, a notice is filed by the surviving entity with the Secretary of State within the state where the entity has been formed. Statutes often provide that corporations formed in different states must follow the rules of the respective states for a merger to be effective. In addition, companies involved in a merger or acquisition may need to comply with federal securities laws, unless the transaction is exempt from registration under the Securities Act of For transactions that are not exempt, a registration with the Securities and Exchange Commission is required if the transaction includes corporate modifications, reorganizations or transfers of control in a company.

Ideally, mergers are implemented to facilitate synergism, whereby the value of the merged firm is greater than the sum of the two separate entities. However, mergers are not always this neat. The combined company after a merger can become too large, which can create management problems. Also, company founders or top performers who have aggressively pursued profits at an individual company may become disenchanted by heavy-handed managerial oversight from an acquiring company.

Or, the combined operations of the merged companies may not operate as efficiently and effectively as a smaller, streamlined business. Mergers and acquisitions are reported and analyzed using unique accounting methods. Historically, there were two accepted methods of accounting for business combinations: However, the pooling method is no longer permitted for new business combinations initiated after June 30, Although the pooling method has been phased out, it is still an important accounting method to understand, as many business combinations used this accounting method until it was eliminated.

The following sections will provide greater details about these two accounting methods. Under the pooling method , all assets and liabilities were recorded at existing book values while goodwill was not recorded.

As a result, the values for the assets and liabilities listed in the accounting records and financial statements of each company involved in a merger or acquisition were carried forward to the surviving company that remained or was created after the business combination.

Under the pooling method, no new assets or liabilities were created by the business combination. Further, the income statement of the surviving company included all of the revenues and expenses of the fiscal year for each company. Ultimately, the operating results for both companies were combined for all periods prior to the closing date, and previously issued financial statements were restated as though the companies had always been combined.

The pooling method was not designed to be used whenever it would produce favorable accounting records. Instead, it was intended to be used only for mergers of two entities of approximately equal value. This method came under increasing scrutiny and disfavor because over time it created disparate financial outcomes in transactions that were otherwise relatively similar, and thus became a tool that could be misused for financial gain. For instance, if an acquiring company paid cash for an acquisition, the accounting records created using the pooling method could appear to reflect that the acquiring company had lower earnings and financial returns compared to companies that paid using debt or a cash and stock combination because an acquiring company paying cash could amortize the additional goodwill on its income statement.

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This paper presents the issues with mergers and acquisitions and discusses the methods to make M&As more successful in an attempt to determine if they are helpful or harmful to the companies, their shareholders, and the economy as a whole.

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This article focuses on mergers and acquisitions (M&A). Mergers and acquisitions are common and in some cases necessary for a business to survive in the current global economy. There are a number.

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